America’s Economic Woes: What Went Wrong and What Lesson(s) Did We Learn?

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I have been inundated with a lot of questions about the global economy this week; a lot of these questions are to do with the impact of the US economical woes on our global franchise, the Zambian Enterprise included.

 

So, I decided to put on my financial consultant hat and delve into as many econometrical variables as possible to try and explain what a layman may not be told are actually the causes of the economic impasse in the United States.

 

We at the Zambian Chronicle saw this coming as early as last year and in January we published David Frazier’s Global Economic Briefing in US Recession Could Affect Our Global Enterprise, The Zambian Enterprise Included …. This was followed by the Bush Administration’s rebuttal in Bush Sees No Recession Yet the very next month.

 

The argument from the administration has always been that economic fundamental have been sound and therefore much of the attention has been on monetary policy as the Federal Reserve Board has been trying to work on efficacy by reducing Fed Funds Rates. By the way, the Federal Reserve Act of 1913 gave the Fed more power than even the President of the United States when it comes to fiscal policy …

 

The problem with the reduction(s) of the funds rates though was that it created an illusion that by lowering the rates, the cost of borrowing would be lower thereby encouraging market participation by increased credit derivatives (lending and borrowing) in the market.

 

So new buyers were introduced into the system; mortgagee(s) rushed in and started refinancing already existing loans at the new lower interest rates at times cashing in on existing equity and business was booming as finance companies managed to make tones of money from loan origination fees, increased their asset holdings at much higher appraised values while turning around to sell mortgaged backed securities on the secondary market.

 

This illusion missed one point though; liquidity, liquidity, liquidity … the US unemployment rate has steadily been increasing from a “One State Recession” in Michigan at about 12% to the national average of about 6%. This meant that more and more people were getting out of work and despite their new lower mortgage rates and cashed out equity, they had no “ability to pay”.

 

Meanwhile the Federal Reserve kept on lowering the funds rates which eventually became a stimulus that would only encourage further mischief as lenders abrogated their fiduciary duties extending credit to unworthy borrowers and cut corners to close on deals.

 

The Fed regime was an accomplice to that reckless behavior. A fed funds rate of around 3.5% was a detriment particularly with commodities prices soaring and incipient inflation coming to US shores from demand-pull pressures and rising labor costs.

 

A real palliative came in as home owners started defaulting due to their lack of liquidity, leading to foreclosures and short sells. As homes foreclosed and or are short sold, their values declined thereby creating negative equity.

 

But that’s not all, what added salt to the injury is what is called “securitization”. This particularly in the US market comes in the form of Mortgage Backed Securities – MBS. These are asset backed securities sold on the secondary market whose cash flow is backed by collateralized mortgages.

 

Any one with an understanding of basic finance knows that if you borrowed $100,000.00 for 30 years you would probably pay back $300,000.00 on that same mortgage, $200,000.00 of which would be interest income for the lender.

 

These MBSs are backed by that interest income, sold as bonds and or other financial derivatives on the secondary market with a guaranteed yield. Insurance companies, retirement funds and other ultra-virus thrifts like to invest into these marketable securities because of their guaranteed revenues.

 

Well, the problem is if people have no work and thereby are defaulting, then the MBSs are not in actuality guaranteed for the loan term(s) because of foreclosures and or short sells in a downturn economy or prepaids in a vibrant one.

 

These marketable securities (MBSs) are a prerogative of the Securities and Exchange Commission (SEC) and they are regulated by them but they were asleep at the switch. The Federal Reserve Board is in charge of monetary policy and just kept on lowering funds rates and was asleep at the switch.

 

The Department of Treasury has a stake in checking on the yields from MBSs because they affect yields on Treasury Bills but was asleep at the switch; the Bush Administration was busy chasing Bin Laden and was asleep at the switch while the US Congress are supposed to be the watchdog for the tax payers but were busy fighting partisan politics, sleeping at the swath.

 

As of the first quarter of 2006, the total market value of all outstanding MBSs was approximately USD 6.1 trillion, according to The Bond Market Association. These are paper assets in which tax payers’ retirement security has been vested and is likely to be lost if no one takes the right steps going forward.

 

There two schools of thought going on this weekend in Congress, one that says a Government bailout means socializing the markets. Another school of thought wants to lend money to Fannie Mae and Freddie Mac so they can pay back with interest using market forces.

 

We at the Zambian Chronicle see an opportunity for the Federal Government so good to be passed on. The best route would be an outright bailout that places Fannie Mae and Freddie Mac under receivership.

 

This route would not only make the American tax payers shareholders in the $700 billion bailout  enterprise but as these non-performing loans are turned around into performing assets all future interest income can be turned around to be invested into the Social Security and Medicaid/Medicare Trust Funds which are scheduled to go bankrupt by 2045.

 

… problem is I am not running for President of the United States of America; can’t run – not a US born citizen and so they probably would not listen …

 

In closing, this is a dire lesson for all emerging markets, the Zambian Enterprise included. What we have learnt is that greed is bad; using securitization, fund managers increased their income as they lowered their own risks.

 

By cutting corners, greedy loan officers and finance companies made a short term killing and by sleeping at the switch, the SEC, the Feds, the Bush Administration and the US Congress almost crushed the world’s beacon for capitalism.

 

Sometimes, it’s good to know that no one is actually looking out for you after all, you are on your own and you better watch your own back …

 

Live Long & Prosper; that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion.

 

Brainwave R Mumba, Sr.

CEO  & President – Zambian Chronicle 

 

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MPs reject EU treaty referendum

MPs have rejected proposals to hold a UK-wide referendum on whether to ratify the EU’s Lisbon Treaty. The House of Commons turned down the Conservative proposal by 311 votes to 248 – a margin of 63.

The result means Parliament itself will decide whether to ratify the treaty, signed by EU leaders last December.

Thirteen Lib Dem MPs rebelled against the party’s orders to abstain on the referendum vote, with three frontbench spokesmen resigning their posts.

MPs rejected the Conservative amendment to the EU (Amendment) Bill, but 29 Labour MPs supported it. Three Tories defied their party leadership.

Manifestos

All EU parliaments must ratify the treaty before it can come into force. The only country which has committed to a referendum is Ireland.

We hope that in this case the Lords will hold the government to their manifesto commitment William Hague, Conservatives Clegg revamp after rebellion

The three main UK political parties promised a public vote on the EU Constitution in their 2005 general election manifestos.

But the constitution was rejected by the French and Dutch electorates later that year. The Lisbon Treaty was drawn up to replace it.

The government and the Lib Dems say the treaty does not have constitutional implications, so a referendum on it is not needed.

The government says most changes are minor and procedural and it has secured “opt-outs” where necessary.

Month-long debate

But the Conservatives, some Labour and Lib Dem MPs and the UK Independence Party among others, say that it is effectively the constitution under a different name – so there should be a referendum.

Shadow foreign secretary William Hague said: “This treaty will now go to the House of Lords.

“It is convention that the House of Lords does not stand in the way of manifesto commitments. We hope that in this case the Lords will hold the government to their manifesto commitment.

“The Liberal Democrats’ position will once again be pivotal. We will see if they follow their three-line whip in the Commons to abstain.”

The Lib Dem leadership, which instead wants a referendum on whether the UK should stay within the EU, ordered its MPs to abstain in the Tory-led debate.

But 13 refused to do so, instead voting for a referendum on the treaty.

Scottish affairs spokesman Alistair Carmichael, countryside spokesman Tim Farron and justice spokesman David Heath resigned from the Lib Dem frontbench team.

MPs have been debating the different elements of the treaty over the past month.
BBC

 

Dollar Sets a New Record Low – Money News

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BERLIN — The dollar sank to a new low against the euro Wednesday on pessimism about the American economy and speculation Washington will soon cut interest rates again.

The euro spiked to $1.4855 before retreating slightly to $1.4787 in morning European trading. It broke the $1.48 mark for the first time on Tuesday, settling at $1.4815 late in New York.

The dollar also hit a two-year low against the Japanese yen, falling to purchase as little as 108.81 yen before rising slightly to 109.19 yen – compared with 109.69 yen in New York on Tuesday. It was last lower when it purchased 108.76 yen on Sept. 5, 2005.

The British pound was down slightly to $2.0639 from $2.0667 in New York.

The euro, the pound and other currencies have been climbing steadily against the dollar since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

Surging oil prices – which rose to a new record high above $99 in early Asian trading Wednesday – have driven up commodity-backed currencies such as those of Canada, Australia and New Zealand.

The dollar has been further weakened by U.S. interest rate cuts – which can be used to jump-start an economy, but can also weaken a currency as investors transfer funds to countries where they can earn higher returns.

On Tuesday the U.S. Federal Reserve released the minutes of its October meeting and its economic forecasts for the next three years, which suggested to investors that a December rate cut was imminent given the state of turmoil in credit markets and the Fed’s forecast of decreasing inflationary risk – contributing to the dollar’s weakness.

© 2007 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

 

Yulia Tymoshenko Likely Next Ukrainian Premier

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To her legions of adoring groupies she is the Orange Princess, the goddess of the Ukrainian revolution and the world’s most beautiful politician.

Even her critics admit that with her blonde hair braided in the traditional Ukrainian peasant way like a crown around her head and her flamboyant designer outfits, Yulia Tymoshenko cuts a surreal figure, a cross between Princess Leia of Star Wars and Princess Diana. Her striking appearance helped to turn her into a global cultural icon when she took to the barricades during Ukraine’s Orange Revolution and then during her brief stint as prime minister last year.

Forbes magazine declared Tymoshenko the world’s third most powerful woman after Condoleezza Rice, the US Secretary of State, and Wu Yi, the Chinese vice-premier; any day now, depending on the outcome of the coalition negotiations in Kiev, Tymoshenko will either return as Ukraine’s prime minister or emerge as her country’s power-broker.

Given the popstar-style hype that invariably surrounds her, I was half fearing disappointment when I went to see Tymoshenko last week. She was on a fleeting visit to Britain to meet financiers and William Hague, the shadow foreign secretary. I needn’t have worried.

After a lengthy wait in a corridor in front of her suite in the Savoy, which was guarded by severe-looking Ukrainian bodyguards and American advisers, I was finally ushered in, and there was Tymoshenko, exactly as advertised, a petite figure exuding a huge presence.

She was wearing an elaborate white coat, skirt and matching pearls, handbag and stiletto heels. She is 45, but looks at least ten years younger.

Even more striking than her hair is her mesmerising stare, of an almost shocking intensity, which is in stark contrast to the quiet, almost understated tone of her voice.

She looked unwaveringly into my eyes until she finished answering each question; unnervingly, she continued to stare even as her interpreter translated after her.

My attempts at holding her gaze soon crumbled, and I pretended to fiddle with my tape recorder to avoid admitting defeat. When I looked up again, her brown eyes were still staring at me.

There was one question I was dying to ask her – and it had nothing to do with her fairytale hair, which she claims to do herself every morning in only seven minutes.

Although she is sometimes known as Ukraine’s Iron Yulia, Tymoshenko has never revealed what she thinks of Margaret Thatcher. So what does she think of her? ‘There is probably natural solidarity, female solidarity,’ she began, smiling. But there is a lot more than that.

‘I admire her strong, bright personality,’ she said, something that none of today’s new generation of timid, politically correct wannabe female Tory MPs would ever dare to admit.

Then came the punchline: ‘Yes, indeed, I have Margaret Thatcher as my model.’

When the Spice Girls claimed to be Thatcherites in an interview with The Spectator in 1996, we all knew it was a bit of a joke; but when the formidable Tymoshenko reveals for the first time that Thatcher is her role model she should be taken with deadly seriousness.

There are many similarities between the two women. Like Thatcher, people either hate Tymoshenko or idolise her; no one is ever indifferent.

To her numerous detractors in Ukraine and Russia, she is merely a populist responsible for many of Ukraine’s woes, a vastly rich gas oligarch who made her money running the giant United Energy Systems of Ukraine in the mid-1990s. Tymoshenko laughed this off, and drew parallels between herself and Lady Thatcher: ‘I’m sure that any strong personality in politics gives rise to both positive and negative emotions. The stronger the personalities, the more radical the positive and negative emotions.’

Tymoshenko has long used her femininity for political advantage. She has appeared on the cover of the Ukrainian edition of Elle magazine, has said that any ‘real woman’ would be happy to appear on the cover of Playboy, and makes sexually suggestive jokes.

But after serving as vice-prime minister for two years she was arrested in 2001 and accused of forging customs documents and smuggling gas.

She was subsequently released and cleared of all charges. Those who know her say her 42 days spent in jail gave her a steely determination to succeed and crush her enemies.

Tymoshenko gained a reputation as a bit of a leftist during her first term in office – she was sacked after seven months by President Viktor Yushchenko after a spectacular row – but she is now keen to emphasise her Thatcherite economics.

When she was prime minister, Tymoshenko demanded a large-scale review of the privatisations carried out in dodgy circumstances during the reign of Leonid Kuchma, the former president.

At the time this was widely interpreted as an attack on private property. She now emphatically supports further reforms and claims that her original policy was misunderstood.

‘As a result of the severe political struggle between the old system and the new Orange team, the mass media published lots of myths about re-privatisations, nationalisation and price-fixing.

All of these things I would like to say are absurd, we want to pursue none of these things,’ she assured me. Any disputes over the legitimacy of past privatisations – some of which were carried out at discounted prices to friends of the previous pro-Russian regime – would be determined by the courts.

‘The legitimacy or otherwise of privatisation or anything connected with private property is not in the remit of any bureaucrat, only of the courts.’

Although the Orange Revolution is widely viewed as a disappointment, Tymoshenko argues that it has done much good and that she can’t wait to be in a position to rekindle its flames.

‘Before the Orange Revolution we had an absolutely post-Soviet state with all the post-Soviet rules,’ she said. There was ‘corruption, clans, unpredictability, helplessness, absence of an effective courts system, absolute bias and a lack of independence of the mass media.

To understand the importance of the Orange Revolution one needs to have lived in that period. The Orange Revolution has changed Ukraine absolutely.’

She wants to restart an ambitious programme of free-market reforms. ‘While I was in the government as prime minister, my government managed to abolish more than 5,000 regulatory Acts which were creating terrible conditions for corruption in businesses.

Under my government, the only transparent, honest privatisation took place. We would like to continue these policies.’

She assured me that she will continue to privatise Ukraine’s strategic industries, starting with the communications sector, slash duties and tariffs; remove barriers to foreign banks and insurance companies and ‘reform the judicial system to provide guarantees for stability and reliability’.

One of the biggest challenges for both Tymoshenko and the West is that 80 per cent of Russia’s gas exports to Europe go through Ukraine.

Earlier this year, to punish the country for the Orange Revolution, President Vladimir Putin massively hiked the price Ukraine pays for its gas; he briefly switched off the supplies, which also affected Europe.

‘Ukraine respects Russia as its neighbour, as a political partner, but the question of energy independence for Ukraine is the issue number one. The reason why it hasn’t been solved is that there was no political will from political authorities.’

She told me that she wants to attract foreign investors to help rebuild the oil and gas sectors, to integrate Ukraine’s electricity network into Europe’s, to burn more coal and less gas, build new pipelines and make nuclear power stations safer.

In terms of raw politics, Tymoshenko is in a class of her own, an astonishingly powerful communicator who perfectly projects a constantly evolving image of herself; she was a long-haired brunette just four years ago.

She is a master at brand-building: her political party is called the Yulia Tymoshenko bloc and she is probably the only living politician, apart from Fidel Castro, whose clothes and hairstyles set fashions.

Her personal life – she is married but has been linked to many powerful men – leads the magazines and gossip columns. Her website, which has an English edition, is by far the most sophisticated of any politician this side of the Atlantic.

Tymoshenko-branded merchandise is available for download, including a computer screensaver of her posing on a motorbike, as well as dozens of mini-films, political broadcasts and audio files.

There are also photos of the recent wedding of her daughter Yevgenia, a London School of Economics graduate who married Sean Carr, a long-haired member of the Yorkshire rock band, the Death Valley Screamers.

Talks between Ukraine’s parties have been going on since the elections on 26 March. A new Orange coalition is most likely and could be announced as early as this week.

It would be led by the Tymoshenko bloc and also include two other parties, Viktor Yushchenko’s Our Ukraine and the Socialists.

‘For the second time, the population has voted for the European orientation, the European vector of policy, for the integration in world markets, into the civilised way of development,’ Tymoshenko said.

She acknowledged that the long-winded negotiations ‘could look to some like instability or disorder but this I can assure you is not the case. All this testifies that a rapid and intense transformation is going on.

Ukraine today is the Poland or the Czech Republic of the 1990s. All ways are open to us.’ On that note, Ukraine’s answer to Maggie got up, picked up her handbag and bade me farewell.

Allister Heath is associate editor of The Spectator and deputy editor of the Business.

 

Greenspan Says Euro Could Replace Dollar

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Former U.S. Federal Reserve chairman Alan Greenspan said it is possible that the euro could replace the U.S. dollar as the reserve currency of choice.

According to an advance copy of an interview to be published in Thursday’s edition of the German magazine Stern, Greenspan said that the dollar is still slightly ahead in its use as a reserve currency, but added that “it doesn’t have all that much of an advantage” anymore.

The euro has been soaring against the U.S. currency in recent weeks, hitting all-time high of $1.3927 last week as the dollar has fallen on turbulent market conditions stemming from the ongoing U.S. subprime crisis. The Fed meets this week and is expected to lower its benchmark interest rate from the current 5.25 percent.

Greenspan said that at the end of 2006, some 25 percent of all currency reserves held by central banks were held in euros, compared to 66 percent for the U.S. dollar.

In terms of being used as a payment for cross-border transactions, the euro is trailing the dollar only slightly with 39 percent to 43 percent.

Greenspan said the European Central Bank has become “a serious factor in the global economy.”

He said the increased usage of the euro as a reserve currency has led to a lowering of interest rates in the euro zone, which has “without any doubt contributed to the current economic growth.”

© 2007 Associated Press. All Rights Reserved.

By press time of the article above, the US Federal Reserve had not yet announced its intentions to cut benchmark rates by half a percentage point.

As of the time of this posting the rate stood at 4.75% bringing new surge in the markets around the world with the Dow Jones gaining over 300 points in one day … thanks a trillion.

Brainwave R Mumba, Sr.

Market Reaction Around The World …

StarPhoenix Interest rates decision spurs Australian stock market Melbourne Herald Sun, Australia – 1 hour ago THE US central bank’s decision to slash interest rates for the first time in four years spurred the Australian stock market to its biggest one-day rise in a … Fed Cuts Rate Half Point, and Stock Markets Soar New York Times Fed lowers interest rate, and stock markets soar Kansas City Star Fed’s Rate Cut Korea Times TheStreet.com (subscription) – San Jose Mercury News all 2,326 news articles » Aljazeera.net Asia markets soar after US rate cut Aljazeera.net, Qatar – 8 hours ago Asian stock markets have seen strong gains, following the first cut in US interest rates for four years. Shares on Wednesday were up by more than 3 per cent … Asia Stocks Jump After Wall Street Surge Washington Post Most Asian markets lower; Tokyo stocks fall amid renewed concern … International Herald Tribune Financials weigh on Asian stock markets Financial Times Euro2day – Euro2day all 393 news articles » StarPhoenix Toronto stocks seen rising on commodities Reuters Canada, Canada – 3 hours ago TORONTO (Reuters) – Toronto’s main stock market index was seen opening higher on Wednesday as the US Federal Reserve’s bigger-than-expected interest rate … Stocks surge post-Fed Globe and Mail Toronto stocks steady ahead of Fed decision Reuters Canada Toronto stocks steady before Fed decision Reuters Canada Globe and Mail – The Canadian Press all 146 news articles » Montreal Gazette Clash Of The Emirates Forbes, NY – 21 hours ago … could give Nasdaq an extra-thick financial shield against the ambitions of Dubai as well as more investment in international stock markets for Qatar. … Stockholm shares close lower, but OMX up on M&A speculation – UPDATE Forbes all 48 news articles » Hindu Stock markets, rupee scale record highs Earthtimes.org – 2 hours ago The 30-stock Bombay Stock Exchange sensitive index (Sensex) rose 653.63 points or 4.2 percent to 16322.75 at close. All the components of the index were … Markets surge on Fed Reserves rate cut buzz Business Standard Sensex breaches 16000 mark; up 653 points at close Zee News Sensex recovers initial losses in late morning deals Hindu Hindu – Economic Times all 87 news articles » Stock Market Update – Wed Sep 19 12:00:01 EDT 2007 Reuters – 11 minutes ago … 5.5% gain in the stock. The feeling that the market is getting a bit overbought on a short-term basis could invite some afternoon selling interest. … Stock Market Update – Wed Sep 19 09:45:01 EDT 2007 Reuters – 2 hours ago COM] The stock market has started the session on an upbeat note as the good vibes from yesterday’s trading continue to be felt. … Global stock markets rally after US interest-rate cut Belfast Telegraph, United Kingdom – 8 hours ago Stock markets across the world are continuing to rally amid signs that the global credit crunch is starting to ease. The rally follows a decision by the US … Stock Market Update – Wed Sep 19 10:35:01 EDT 2007 Reuters – 1 hour ago COM] Buying interest has calmed after the excited start that followed yesterday’s rate-cut rally and the huge gains in foreign markets overnight. … Capital News 9 After Fed cut, debt market problems persist CNNMoney.com – 1 hour ago Global stock markets cheered Tuesday after the central bank cut the target for a key short-term interest rate. On Wall Street, the Dow Jones industrial … AP Executive Morning Briefing The Associated Press Debt Market Looks to Fed to Restore Confidence New York Times Wall St. awaits the other Fed guy CNNMoney.com CNN-IBN – USA Today all 157 news articles »